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Final Tangible Property Rules – A Win for Small Business?

Black-eyed-peaOne of the New Year’s superstitions says that you should eat black-eyed peas for good luck and financial prosperity. If you (or your client) are a business owner who hates black-eyed peas, don’t worry. You got a bit of luck already. In issuing the final tangible property (aka repair) regulations, I believe the IRS went above and beyond to make the final regulations more taxpayer friendly and tried to reduce the administrative burden from the draft regulations. 

When a business buys equipment for their business, it may qualify for an immediate tax savings by expensing the full purchase price instead of depreciating it over its useful lives (e.g., the section 179 deduction and 100% bonus depreciation). However, these options have restrictions. For example, the section 179 deduction requires taxable income and imposes an overall deduction ceiling and the bonus depreciation has a new property requirement (e.g., refurbished assets are not eligible). With well thought out planning, businesses can maximize the tax savings using both options.  

Now, thanks to the new regulations issued this fall, businesses can add one more option – the de minimis safe harbor election. That means the business can deduct the full purchase price of tangible property (e.g., laptops, monitors) in one year if they meet certain requirements. (For a convenient summary of all the requirements and rules, see the AICPA’s quick summary chart.)

The final regulations, which generally take effect Jan. 1, 2014, provide more clarity on when and how to deduct such amounts for tangible property and include a number of provisions to accommodate small businesses, including:

  • the de minimis safe harbor
  • the routine maintenance safe harbor for buildings
  • the new small taxpayer safe harbor election for taxpayers who own residential or commercial rental properties. 

Amounts for repairs and maintenance are generally deductible in the year they are paid or incurred and amounts for improvements are capitalized and depreciated. Unlike the earlier de minimis safe harbor, the modified version eliminates the overall ceiling amount and is available to businesses without an applicable financial statement. The modified safe harbor allows businesses without an AFS to immediately deduct up to $500 or less (or $5,000 or less for taxpayers with an AFS) for qualified property. For example, a business could deduct 1,000 iPad Minis costing $500 or less each year. 

The modified safe harbor is simpler for certain taxpayers to comply with than the section 179 deduction and 100% bonus depreciation. Additionally, the inclusion of taxpayers without an AFS in the de minimis safe harbor is a win for many small businesses that do not have an AFS as the AICPA previously suggested

However, the final regulations are not perfect since many believe that the new rules are still too complex for the average person to understand and I agree. But providing a number of elective provisions and modifying prior rules to accommodate small businesses gave more taxpayers flexibility and simplicity.

Whether or not you like the new rules, they are here to stay. So it’s time to learn more about them and to advise your clients accordingly. Please visit our tangible property resource page for additional resources, including answers to FAQs and, coming soon, a sample capitalization policy that taxpayers can use to qualify for the harbor.

Jason Cha, CPA, Technical Manager - Taxation, American Institute of CPAs. Jason serves as staff liaison to the Corporations and Shareholders Technical Resource Panel, as well as the Tax Methods and Periods Technical Resource Panel and related task forces. Prior to joining the AICPA, Jason was a tax manager at KPMG LLP. His more than 14 years of public accounting experience includes advising clients on tax issues affecting individuals, pass-through entities, and corporations.

Black-eyed pea image via Shutterstock

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